India’s outsourcers battle for customers in a cloudy universe

Still on top but heeeere comes China ...

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Cloudy and dangerous

In focusing on the prospects of different nations, though, there is a danger of missing the wider picture of what’s happening to the IT outsourcing market. A Gartner report at the end of last year – Predicts 2013: Indian IT Industry Set to Embrace Uncertainty to Secure the Future – claimed that “globally, cloud-based offerings are estimated to cannibalise up to 15 per cent of top outsourcing players' revenue by 2015”.

Cloud computing represents both a threat and an opportunity for Indian outsourcers, which are trying to transform themselves by offering higher value services.

Indian IT players are having to battle with their headcounts based on linear business models, which have worked so far but are unlikely to help them remain competitive as they grow. Linear head-count-based business models after a certain size do not support the need for being faster, better and cheaper. Indian IT providers have to explore non-linear techniques and creative destruction strategies to create value for their clients as well as to sustain themselves.

These "non-linear techniques" include cloud computing-related services, which Gartner’s Roy argued Indian providers are already adopting in order to protect and grow revenue. Rather than the nuts-and-bolts of hosting and running cloudy datacentre operations, their R&D is increasingly being focused on “integrating the activities buyers need when they move to a cloud delivery model”. This could be in helping to integrate and manage a customer’s multiple cloud platforms – what Gartner calls “cloud services brokerage”. According to Roy, Infosys is looking to grow its revenues in this area – part of what it loosely terms “products, platform and solutions” – from five per cent today to around a third of total revenues in the next five years.

From services to software

For Forrester’s Giron, India’s “complex journey” towards a non-linear growth strategy began two or three years ago and has involved “huge investments leveraging software frameworks and methodologies to do the same tasks with fewer people”. Aside from automating delivery, its big name providers have been looking to find new offerings like managed services with which they can build incremental revenue and continue the transition from that human capital intensive model to one based on utilising software assets.

“The next step in their non-linear strategy is for them to become more of an ISV - more of a software vendor than a pure people provider,” he told The Reg. “This will require a huge amount of change because you don’t run a services business like you run a software business. They’ll have to learn from the likes of Microsoft and SAP how to sell solutions rather than services.”

Just how difficult this change will be remains to be seen. Of course, a huge amount of revenue is still generated from traditional IT services, but there are growing signs that this new direction is gaining momentum. A new thinktank, the Indian Software Product Industry Roundtable (iSPIRT), was launched by a group of 30 local software firms in February, in a bid to promote India as a global software hub – a move Giron described as a “wake up call to NASSCOM to make sure software is part of its strategy”.

However, there’s still a lot of work to do. IDC’s Sahni argued that India’s outsourcers are still some way away from the transformation needed to meet CIO’s changing KPIs. “CIOs are looking for providers which can hit four key areas: organisation management; business strategy; leadership; innovation. But traditional outsourcers are only focused with keeping the lights on,” he told The Reg.

“Indian outsourcing vendors don’t like to invest in advance, you only have to take a look at their R&D budgets to see that. They’re also too compartmentalised in their approach. You have consulting, infrastructure, apps and BPO teams all separate. This [CIO KPI shift] requires all of these departments to fall in line.”

He singled out Wipro, Infosys and Cognizant for moving in the right direction but claimed too many providers are still focused on “monetising what they can off existing infrastructure first”.

“When you talk to Accenture they don't talk about outsourcing, even though it’s a sizeable part of the business, because it’s so ingrained into delivery,” he added. “However, the India-based firms still do talk a lot about outsourcing for outsourcing's sake.”

The bottom line

So what’s the bottom line for IT leaders? Well, whatever happens in India the smart money is on it remaining a major force in IT outsourcing, but rival nations' rapid maturation more choice than ever before is available. That means a chance to spread the geographic risk by taking a portfolio approach.

Forrester recommends identifying one or two other locations based on cultural similarity, similar time zone, and availability of skills, but as a complement to, not a replacement for, Indian offshore work. Ultimately though, customers should go with a provider not a country, so it’s all down to due diligence.

“More choice adds to complexity but I’m not sure that CIOs should be dealing with this complexity. My recommendation is usually to leave the complexity if at possible from a cultural and sourcing perspective to the experts,” said Girod.

“CIOs should be managing the governance of the project. Where the skills are located doesn’t matter – it’s driving the supplier to deliver on their SLAs that matters.” ®